Chapter 3.1

Before we start listing specific bitcoin wallets, it’s important you understand what a bitcoin wallet is and how it works.

As mentioned above, bitcoin wallets are not like ordinary wallets. The two types of wallets have very little in common. Although both traditional wallets and crypto wallets store your funds, they do so in vastly different ways.

What Are Bitcoin Wallets?

Bitcoin wallets are like bank accounts for the bitcoin community. Like a bank account, your bitcoin wallet stores your bitcoin in a convenient place. You can open multiple bank accounts to spread your funds around.

Just like a bank gives you an account number, a bitcoin wallet will give you an address. Your address will be a string of numbers and letters that looks somrthing like this:

1BoatSLRHtKNngkdXEeobR76b53LETtpyT

Think of this address as like your domain name on the internet. Anyone can view your bitcoin wallet address and check the blockchain to view that address. This address is public: you can give it out to anybody. They’ll be able to send bitcoin to your address simply by entering that address into their bitcoin transaction client – like their own wallet app.

You can’t store your bitcoin without a bitcoin wallet. However, a bitcoin “wallet” is just any type of bitcoin storage system. Sure, you can buy hardware wallets from specific manufacturers. However, a piece of paper with secret words written on it can also be your bitcoin wallet. Both types of wallets are effective forms of bitcoin storage.

There’s even something called a “brain wallet”, where your bitcoin fortune is literally stored “in your brain”. As long as you can remember 12 secret words, you’ll always have access to your bitcoin.

There Are Two Broad Types of Bitcoin Wallets

There are a number of different types of bitcoin wallets. However, they can all be separated into two broad categories, including:

Hot Wallets

Cold Wallets

Hot wallets are wallets that are connected to the internet. They’re “hot” because they’re online, which means they’re more accessible (and thus, less secure).

Cold wallets, also known as cold storage wallets, are not connected to the internet. They’re offline. A cold wallet can be a USB stick stored in your safety deposit box. It can also be a piece of paper with 12 or 24 words written on it.

Some wallets function like both. A Trezor is only a cold storage wallet when it’s disconnected from your PC, for example, but it becomes a hot wallet when you’re connected to the internet and accessing your bitcoin funds.

Types of Wallets

All of the wallet types listed below can be categorized as hot wallets or cold wallets. Keep reading to find out the most popular types of bitcoin wallets available today:

Web Wallets

Web wallets are some of the easiest and most popular bitcoin wallets available today. They’re hot wallets because they’re constantly connected to the internet. You don’t need to have any physical device to access your web wallet. Instead, all you need is an internet connection and a login – like a username and password.

Web wallets are similar to PayPal: you’re trusting someone else’s servers with your bitcoin private keys. When you leave your bitcoins in an exchange, you’re trusting your bitcoins to that exchange’s web wallet. There have been infamous cases where hundreds of millions of dollars’ worth of bitcoin has been stolen from web wallets. In many cases, these hacks occur because of a vulnerability within the server or the code.

Pros:

Access your bitcoin from anywhere with an internet connection

Easy to use

Cons:

One of the least secure bitcoin storage options

You’re trusting your bitcoins to a third party, like an exchange or online server

Software Wallets or Mobile Wallets

Software wallets consist of software you download for your computer or mobile device. Today, there are a number of major software developers – like Mycelium – that build Android apps, iOS apps, and computer software designed to store your bitcoins.

These software wallets can function in different ways. Some people use software wallets as cold storage, for example, by installing the software on an offline (air-gapped) computer. Other people use an old, offline mobile device to store cryptocurrencies.

In most cases, however, software wallets are hot wallets. They’re on your daily-use mobile device. They’re installed on your normal PC. They leave your bitcoins accessible at all times. Your bitcoins are as safe as your computer or smartphone is. For some people who are careless about device security, this can be a huge problem. For other people who are careful with their phones, have multiple PIN and backup options, and have a remote wipe function enabled, software wallets can be highly secure.

Pros

Easy to use

Can be installed on virtually any desktop computer (Mac OS, Windows, Linux) or mobile device (iOS or Android)

Free (typically)

Keeps your bitcoins accessible and secure

Cons

Your bitcoins are only as secure as your computer or smartphone

Vulnerabilities within the software can lead to attacks when using the software as a hot wallet (say, if a crypto-stealing virus is already installed on your PC)

Hardware Wallets

Originally, there were two main bitcoin hardware wallet brands, including Trezor and the Ledger Nano S. These two devices function in a similar way: they look like USB sticks. You can store these devices in a safety deposit box, a safe in your home, or in your desk drawer. When they’re disconnected from your computer or phone, they act as cold storage bitcoin wallets. Then, when you connect them to your computer – say, to spend your funds at an online retailer – they become hot wallets.

Today, there are more hardware wallet brands than just Trezor and the Ledger Nano S. There are a growing number of manufacturers seeking to provide the next safest solution for bitcoin storage.

The Ledger Nano S and the Trezor wallet are the two most popular options on the market today. Both are priced at around $100. However, alternatives like KeepKey are gaining market share.

Pros

Made by reputable (often Europe-based) manufacturers with a long history of protecting bitcoin funds

Affordable (priced at around $100 for most wallets)

Easy to store

Easy to access your cryptocurrencies

Can switch between hot storage and cold storage as needed

Can be placed in a safe or other secure storage solution

Cons

Not free

Not indestructible

Brain Wallets

One of the coolest things about cryptocurrencies is that you don’t need any type of physical or software wallet to securely store your cryptocurrencies. In fact, all you need to do is remember 12 words. These 12 words provide secure access to your bitcoin. When you memorize these 12 words – say, by memorizing a mnemonic phrase – you can gain access to your bitcoin at literally any time you need to. This is called a “brain wallet” because you’re securing your cryptocurrency in your brain.

As long as you remember those 12 or 24 words (depending on your desired level of encryption), you’ll have complete access to your bitcoin funds at all times.

Brain wallets and the 12 word passphrase system are based on the BIP39 encryption. Most bitcoin wallets – like software wallets, hardware wallets, and apps – will support this type of encryption when you setup your wallet for the first time. Your wallet will display your 12 or 24 word passphrase. You can choose to write this phrase down. Or, you can memorize it in your head.

BIP39 encryption only requires you to input the first four letters of each of the 12 or 24 word passphrase. So if your first four words are CHILI, DUMPLING, TOKYO, and MAIZE then you’ll only need to memorize CHIL, DUMP, TOKY, and MAIZ. As long as you remember the first four letters of each word, then you’ll always have access to your crypto funds.

Typically, you setup BIP39 passphrases using your existing bitcoin wallet. You transfer your bitcoin to that wallet, then generate a BIP39-encrypted passphrase. You memorize that passphrase or write it down. Then, you can use those words to recover your passphrase at any time. At this point, you can delete the software and rely exclusively on your passphrase to gain access to your bitcoins. Or, you can keep your passphrase as a second layer of defense.

Obviously, brain wallets can be one of the least secure ways to store your bitcoins – or they can be one of the most secure ways. It depends on how much you trust your brain. There are obvious drawbacks – like the fact that nobody will be able to access your bitcoins if you die or lose your memory. However, some people view these as major advantages.

Pros

It’s as secure as your memory or brain

Regain access to your cryptocurrency funds at any point simply by recalling 12 or 24 words

Cons

It’s as secure as your memory or brain

Can make it difficult to quickly access your bitcoins

Paper Wallets

We talked about the 12 or 24 word passphrases up above in the brain wallet section. A paper wallet is like a brain wallet, but instead of memorizing the 12 or 24 words, you write them down in a secure place – like a piece of paper stored in a bank vault or safe within your home.

Typically, your software or hardware wallet will ask you to setup a paper wallet when you first setup your wallet. This paper wallet will ensure you always have access to your funds – even if the device with the installed software gets destroyed or if you lose your hardware wallet in a house fire.

Pros

Easy to use – as long as you can write words on a piece of paper, you can setup a paper wallet

Provides an easy backup option if you lose access to your main software or hardware wallet

Can be securely stored in a bank vault, safe, or locked filing cabinet

More secure than brain wallets because there’s no risk of forgetting your words

Cons

Paper is flammable and destructible

Paper can get wet or disintegrate when stored improperly, making it impossible to decipher your words in the future

Other Physical Wallets (Like Metal Wallets)

In 2017 and 2018, we’ve seen a number of manufacturers release more advanced, hardcore versions of “paper wallets”. These wallets function like paper wallets in that they display your 12 or 24 word passphrase. However, instead of writing your phrase down on a flimsy, flammable, destructible piece of paper, these alternative wallets let you inscribe your phrase in a piece of stainless steel or other durable material.

The advantage is obvious: you can lose a piece of paper in a flood or fire. However, stainless steel will survive virtually any situation. Even if your house burns down, you’ll be able to sift through the wreckage and find your indestructible wallet inside.

Pros

Highly-secure form of passphrase storage

Your passphrase is on indestructible material

Someone can still access your crypto funds if they see your passphrase (say, if they see your wallet and your words)

Cons

Not free

Limited number of options on the market (it’s a relatively new phenomenon)

Multi-Signature Wallet

A multi-signature wallet isn’t really a type of wallet. However, you’ll still see multi-signature wallets mentioned on a list of bitcoin wallet types.

Multi-signature support – also abbreviated as multi-sig – is a feature found on many of the bitcoin wallets listed above. If you’re enabled multi-sig, then you’ll be required to input two signatures to access your cryptocurrency funds.

Some ICO projects use this approach to protect raised funds. Accessing company funds might require 4 signatures from the 5 members of the founding team, for example. This prevents one rogue member from disappearing with all the raised funds.

Other people use a multi-signature wallet for their own protection. You might store your private keys in two separate locations to give an extra layer of cryptographic security.

Pros

Easy to enable on most bitcoin wallets

Adds an extra layer of protection

Makes it difficult to spend or access your funds impulsively

Can protect funds – especially funds stored as a group or as part of a company pool

Cons

Increases the risk of losing a private key or signature

You don’t have full control over your funds if you don’t have full control over the private keys or signatures

Hierarchical Determinist (HD) Wallets

Just like multisig wallets, HD wallets are more of a feature than a specific type of wallet. A hierarchical determinist (HD) wallet lets you generate multiple addresses from within a specific bitcoin address. You can create a subwallet, for example, that hides your public address behind another public address.

This wallet type is also known as BIP 0032. Many major hardware and software wallets have HD support. With HD wallets, the seed is a random, 128-bit value presented to the user as a 12 word mnemonic using common English words – similar to the seed used to protect your ordinary bitcoin funds.

HD wallets can be useful for adding new addresses to your account. Most people use them for privacy purposes. Other people use them to conveniently separate their funds.

Pros

Easy to setup

Available on most major software and hardware wallets

Useful for creating an extra layer of privacy

Cons

Doesn’t provide added security

Conclusion

Ultimately, most cryptocurrency users use a blend of multiple wallets. Most cryptocurrency users have at least some funds stored in an online bitcoin wallet – like an exchange wallet.

Many cryptocurrency users also store funds in a software wallet – like the Mycelium mobile app. Plus, bitcoin users may choose to add an extra layer of protection to that software using a paper wallet. You might use a paper wallet as a backup plan if you lose your mobile device or computer, for example. Some people might backup their funds even further by memorizing their passphrase using a brain wallet, in which case they memorize their 12 word passphrase.

Ultimately, there’s no right or wrong way to store your bitcoins. It’s up to you to decide on your desired balance between security and convenience.